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Chapter 3 student

# Chapter 3 student - National Income Production distribution...

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Unformatted text preview: National Income Production, distribution and allocation 2 Objective and topics • Objective: examine determinants of national income production and how it is distributed • Topics – Production function concepts – Payments to the factors of production – Demand for goods and services – The role of interest rates – Equilibrium and the impact of selected variable changes 3 4 Production of goods and services • Production function – in the general Q = F(X1, X2, X3…Xn) – where Q is output and X1…Xn represent the inputs and available technology – returns to proportion represent what happens when one input changes and the others are held constant - diminishing returns – marginal product - change in q for a unit change in an input holding other inputs constant ( ) 1 1 X Q X MP ∂ ∂ = 5 The Marginal Product of Labor Labor units Total Product Marginal Product 1 10,000 10,000 2 25,000 15,000 3 45,000 20,000 4 60,000 15,000 5 70,000 10,000 6 75,000 5,000 7 78,000 3,000 6 The Marginal Product of Labor 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 1 2 3 4 5 6 7 Units of Labor Total Product Marginal Product 7 The short-run output • Let Y, national output, = Q • K = (capital) • L = (labor) – the overbar denotes the quantities are fixed • With both fixed then: __ K __ L = __ __ __ , L K F Y Over time, we can change the values for K, L and hence Y. 8 Production concepts • Returns to scale(a long run concept) - when all the inputs are changed by the same proportion (e.g. doubled) – constant – increasing – diminishing – we will generally assume constant returns to scale ( ) 2 1 2 ... 2 2 X X f Q = ( ) 2 1 2 ... 2 2 X X f Q < ( ) 2 1 2 ... 2 2 X X f Q > 9 Distributing Income to Factors of Production • The concept of a competitive firm – goal is to maximize profits = revenue - costs – small relative to market – prices dictated by the market – factor prices are given – every firm has the same information 10 How much labor will the firm use? • This will be determined by: – the fixed input level – the productivity of the variable input – the price of the product – the cost of the variable input 11 From Marginal Product of Labor to Labor Demand Labor unit Total Product Marginal Product Price * Marginal Product (MRP) Wage rate 1 10,000 10,000 20,000 10,000 2 25,000 15,000 30,000 10,000 3 45,000 20,000 40,000 10,000 4 60,000 15,000 30,000 10,000 5 70,000 10,000 20,000 10,000 6 75,000 5,000 10,000 10,000 7 78,000 3,000 6,000 10,000 P = 2, W = 10,000 12 The demand for labor 5000 10000 15000 20000 25000 30000 35000 40000 45000 1 2 3 4 5 6 7 Units of labor MRP Wage Y output MPL and the production function L labor F K L ( , ) 1 MPL 1 MPL 1 MPL As more labor is added, MPL ↓ Slope of the production function equals MPL Diminishing marginal returns • As a factor input is increased, its marginal product falls (other things equal)....
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